Computerized market places have in the last few years undergone major changes and a lot of money has been invested in research and development in order to improve the systems. However even though the current systems in use are very sophisticated there exist needs to even further improve computerized systems associated with computerized market places. The computer systems associated with computerized market places are for example the central exchange system where the actual matching of orders takes place, clearing and settlement systems for handling post trade activities and trading systems that are the systems that traders uses in order to send in orders to the central exchange system.
In order to trade different financial instruments such as stocks, options, futures, forwards and so forth the members connected to the market place must typically be associated with at least one clearing account in a clearing house that keeps collateral. The reason for this is that the clearinghouse works as an intermediary between the seller and the buyer and in order to avoid that any one of the parties of a trade defaults so that an agreed trade can not be executed the clearinghouse needs collateral stored in an account. Usually this collateral is stored in a margin account and can be divided into initial margin and variation margin. The initial margin shall cover heavy market movements of the positions and the variation margin is the positions' accumulated profit and loss, which is typically subject to a daily mark to market. The initial margin can be calculated using different positions in different financial instruments and by netting positions.
A problem that the clearing houses are facing is the issue of making sure that there is enough initial margin in order to cover heavy market movements for a desired number of lead days but also that the margin requirement is not over conservative since this will restrain the market.
Commercial available margin models such as SPAN, OMS II and TIMS calculate initial margin per contract. Correlations between these contracts are handled differently between these models but in general all are ill suited for markets that exhibit very strong correlation. Furthermore calculating initial margin per contract is not optimal for certain instruments such as FX forwards and interest swaps since the total risk can be closed out by a combination of several different contracts. Calculating initial margin per contract will therefore give over conservative margin requirements for these types of portfolios.
Hence there is a need for an improved method and system for providing margin requirements.